This year one of the major scandals in the US securities market should be the improper stock option backdating practices. SEC is now busy for conducting the investigations and filing the charges.
Stock options are generally granted to senior executives of listed corporations. Granting stock options was once a cheaper way for remunerating staff than paying salaries & bonues, but now the options should also be expensed.
With "backdating", the option grant document reflects a date in the past, when the stock price was much lower than the level at the real grant date. Apparently the options are granted at-the-money, but actually in-the-money. Such practice is both unfair and fraudulent because the real option expenses are not properly reflected in earnings & taxes and thus not clearly communicated to the shareholders.
The scandals may have erupted from the Wall Street Journal's findings that at several companies the option grants almost always occurred on days when the stock price was much lower than normal (or even the lowest during the fiscal year). Then a number of US companies were found to have played the backdating trick.
In the past, when SEC regulations are less strict, the executives were permitted to report the option grants very late, thus leaving room for backdating. Now under Sarbanes-Oxley Act, companies must report option grants within two business days. Many backdating cases did occur in the last decade. Those companies caught so far by SEC have not yet let us see the full iceberg.
Malpractices made by senior executives of listed companies are so innovative. But I think, in many times, such acts would not be made feasible without the implicit consent of the Board. Corporate governance is always the fundamental challenge to regulators and compliance officers.
Corporate Governance is a popular term recently. Though the hit has cooled down a bit, it is still something for good business opportunities (Master courses, auditing services targeting to satisfy the Sabine Oxley Act), lots of job opportunites (money making) have been created.
ReplyDeleteI have seen on listed company establish a Corporate Governance Department, I have also seen one listed company expanded the company secretarial department for complying the corporate government requirements of the listing rules. The INEDs of the later company are not independent at all, they are personal friends of the chairman. I wonder what the Corporate Governance Department plays.
People think that Corporate Governance is a bunch of rules to be satisfied. The internal control of one of the listed company I mentioned is a mess, by the minimal standard (I don’t want to be offensive).
Someone says Corporate Governance is about “self governance”. I think CG is just as simple as this.
I think I understand what self-governance is. I certain believe that it is the target we aim for. Without it, no matter how much time and effort spent on written policies, training, auditing and control will be a waste.
ReplyDeleteBut, how to achieve self-governance? It sounds like requesting every staff member to be good citizen.
Yes. So far, I have hardly seen self-governance. It however is not as difficult as we think. Self-governance is demonstrated by:
ReplyDeletedepartment head take initiative to read through relevant rules to see what the deparment under his control could do to avoid non-compliance; operational staff think ways to resolve operational problems cassed by new requirements; head of departmetn personal, instead of asking the compliance officer to, gives compliance related directives; senior mgt asks the compliance officer what improvement is requirement and personally supervise the implementation or designated a senior personnel to take charge rather than asks the compliance officer to head the project; staff approach the compliance officer for regulatory requirements and stick to the rules afterwards without asking the compliance officer to set up control procedures for them to comply ........ the happening of all these is demonstration of self-governance.
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ReplyDeleteCorporate governance ("CG") requirements may sometimes be incorporated into pages of "self declaration" or "self assessment".
Of course, staff members(no matter how senior they are) merely sign without reading and understanding what is written.
This is an example of lack of self governance. People concerned, senior management in this case, simply don't care about what is going on. They in fact have not done what they should do.
ReplyDeleteOne should be happy about if people concerned are willing to sign on the declaration forms. Signature means responsibility. I think this is the farthest we can go. I have come across people simply don't care and you are not allowed to bother them. So, ...
ReplyDeleteI think this is the highest hurdle for compliance officers.